Risk of Switching to Clean Energy from Fossil Energy

• According to a study recently published in the journal Global Environmental Change, India's banking sector is extremely vulnerable to the risks associated with the country's economy shifting from being heavily dependent on fossil fuels to clean energy.

What has been discovered?

Change can have a negative impact on:

• As a result of its strong exposure to fossil fuel-related activities, India's banking sector will be negatively impacted by any switch to clean energy.
• The extraction of oil and gas accounts for 60% of credit to the mining industry.
• Petroleum refining and allied businesses account for 20% of the debt in the manufacturing sector.
• The main source of carbon emissions, which accounts for 5.2% of total outstanding credit, is electricity production.
• Experts are in short supply, making it difficult for India's financial institutions to give the institutions the proper advice on the switch from dirty to clean energy.
• Only four out of the ten largest financial institutions assessed gather data on environmental, social, and governance (ESG) issues and these companies do not consistently use that knowledge in financial planning.

Reduced Ability to React to Shocks and Stress:

• 10% of the total debt owed to Indian financial institutions is from high-carbon businesses like power generating, chemicals, iron and steel, and aviation.
• These industries have less financial capacity to respond to shocks and stressors since they are also deeply indebted.
• This will increase the risk that the transformation poses to India's financial sector.

More Polluting and More Expensive Energy Supply:

• The financial decisions of Indian banks and institutional investors are locking the country into a more polluting, more expensive energy supply.
• For example, only 17.5% of bank lending to the power sector has been to pure-play renewables.
• Consequently, India has much higher electricity from carbon sources than the world average.
• Coal currently accounts for 44% of India’s primary energy sources and 70% of its power(electricity).
• The country’s coal-fired power plants have an average age of 13 years and India has 91,000 MW of new proposed coal capacity in the works, second only to China.
• According to the Draft National Electricity Plan 2022, coal’s share in the electricity generation mix will decrease to 50% by 2030.
• It is possible that India's financial industry is significantly exposed to potential transition risks based on present lending and investment patterns.
• The enormous possibility to direct financial resources toward sustainable assets and activities, on the other hand, is the flip side of dangers.

India pledged to achieve net-zero emissions by 2070 in 2021.

• India has also stated that it intends to meet 50% of its electricity demands using non-fossil fuel sources by the year 2030.
• To satisfy these obligations, finance in the range of at least a trillion dollars will be needed.